Why Local Is Better than Global in the World of Low-Carbon Finance

Building climate-friendly technologies comes with a price tag; installing solar panels, erecting wind turbines, and implementing new public transportation systems all cost money. Yes, these projects often pay for themselves in the medium run, and are often even cheaper than high-carbon alternatives on a life-cycle basis, yet the up-front costs can be daunting for lower-income countries with modest public resources and underdeveloped capital markets.

How to most effectively mobilize financing for low-carbon projects in developing countries— where two-thirds of all climate-friendly infrastructure funds are needed—has long been a focus on the world stage of climate negotiations. And because virtually every country in the world has committed to undertake ambitious climate action in the context of the Paris Agreement, that question is more important than ever. Many international and domestic funds and initiatives exist to help fund low-carbon development in emerging markets, but the result is a system that is so complex that it is analogous to trying to water a garden through a network of straws. The climate finance system today is complicated, inefficient, and not designed to mobilize and deliver the trillions of dollars in blended public–private financing needed to rapidly scale low-carbon infrastructure in emerging markets.

Rocky Mountain Institute is working to shift the focus of this system to the national level, to empower and enable developing countries to take greater ownership and control of low-carbon infrastructure finance. We feel it is the only way to drive high-volume, high-impact capital flows commensurate with a two-degree world.

Green Investment Banks—A Hub for Climate Finance

Our latest insight brief, Beyond Direct Access: How National Green Banks Can Build Country Ownership of Climate Finance, looks at how national institutions such as green investment banks are emerging as a promising model. Instead of relying on international financial intermediaries like multilateral development banks and development finance institutions, countries should build national financial institutions that can channel growing domestic savings into low-carbon development. This would allow concessional foreign investment to be used to spur new, more risky, markets while private investors could fund technologies with longer track records like wind and solar.

National institutions such as green investment banks can be a one-stop hub for climate funds. In emerging markets, grants and loans will never go far enough to support all the projects necessary to shift the direction of climate change. These nationally owned, commercially operated institutions can coordinate capital inflows (e.g., from the Green Climate Fund, the World Bank, and bilateral climate assistance) while building the long-term domestic “plumbing” for deploying capital via local commercial/investment banks and local savings. They can be the first to demonstrate financial-engineering solutions in the local context that can then be replicated by other market actors. They can also build new markets to catalyze the deployment of a wider array of technologies, and develop the local financial expertise that will ensure that financing for low-carbon projects becomes mainstream. Finally, they create a tight feedback loop to governments, providing policy and regulatory guidance aimed at unlocking capital flows.

Moving Beyond Multilateral Climate Funds

The climate finance system should evolve to adequately reflect the needs of countries. For emerging markets, this means moving beyond access to multilateral climate funds and toward a redesigned architecture that gives greater authority—and accountability—to national institutions. National green investment banks, which can be new or existing institutions, have the potential to be a linchpin of a more holistic approach to funding climate solutions—one driven by domestic ownership and investment and with the ability to access international support without being tied to it.

The Beyond Direct Access insight brief considers this pivotal moment in the evolution of the climate finance system—both its political and practical dimensions—and how that system can become fit for purpose in the context of the Paris Agreement. Money may be the means, not the end, of climate action, but the fate of the planet may depend on getting it flowing to the right places faster.